All-Seeing Axsys

Don’t believe the stereotypes about Democrats. President Barack Obama isn’t about to cut the $600 billion defense budget, not with wars going on in both Iraq and Afghanistan. As General Dynamics’ CEO said, that’s “just inconceivable.”

But Obama seems to support a specific kind of defense, products like AeroVironment’s unmanned aerial vehicles, because they keep soldiers out of harm’s way. Cramer recommended AVAV just before Election Day, and the stock’s risen 31% since. Now he thinks Axsys Technologies, a similar play, could deliver the same returns.

Axsys makes high-performance surveillance cameras and imaging systems, used for everything from missile tracking to unmanned drones to vision enhancement. They offer life-saving applications, such as those used in the Army’s “We Own the Night” strategy in Afghanistan, and they act as force multipliers, which means more can be done with fewer boots on the ground. Given Obama’s Iraq withdrawal strategy, that sounds like a business he could get behind.

Axsys supplies the usual suspects – Department of Defense, Border Patrol, Raytheon, Northrop Grumman, Lockheed Martin, Boeing, Thales – and there are a number of potential new contracts on the horizon as well.

The company teamed up with Raytheon and BEA Systems in hopes of landing a $2 billion deal for something called Drivers Vision Enhancer-Family of Systems, which improves drivers’ vision, especially at night. And Saudi Arabia is offering a $2.5 billion border-security contract, part of which could go to Axsys.

There’s recurring revenue here, too, generated through replacement parts for previously sold equipment. This accounted for 70% of Axsys’ bookings last quarter. Going forward, the company expects to ship 91% of its $184 million in backlog orders over the next year.

The stock is 49% off its high, thanks to a J.P. Morgan downgrade back on Dec. 10. But since then the same analyst has upgraded Axsys twice. It’s just this tough market that’s keeping the share price down.

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Axsys trades at just 13 times expected 2010 earnings with a long-term growth rate of 19%. If the multiple matches that growth rate, which could happen, then this $40 name jumps to $56. If not, the stock at this level might attract a takeover bid. And a premium offer would give investors another chance to profit.

But, of course, this is a small company. Its market cap totals just $835 million. So don’t chase it as it goes higher, be sure to use limit orders and buy in small increments. In fact, don’t buy – should you choose to – at all until after the Feb. 18 earnings report. Axsys may have a great track record, but this is still a speculation play.